CMA Foundation · Fundamentals of Business Economics and Management · Forms of Market
In the long-run equilibrium of a monopolistically competitive firm, which statement is correct?
In long-run equilibrium, a monopolistically competitive firm earns only normal profit because price equals average cost. Entry of new firms shifts each firm's demand curve leftward until it just touches the average cost curve, removing any abnormal profit.
- APrice equals marginal cost and the firm earns abnormal profit
- BPrice equals average cost and the firm earns only normal profitCorrect
- CPrice is below average cost and the firm earns abnormal profit
- DPrice equals marginal revenue at the minimum point of average cost
Explanation
Free entry attracts new firms while abnormal profits exist, shifting each firm's demand curve left until it is tangent to the average cost curve. Hence price equals average cost and profit is normal. Price equals marginal cost only under perfect competition.
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